Success from the deal that wasn’t

2 Replies

This is a little different success story than most as I don’t have a nice cashflowing property to share, but I certainly learned and will take it to the next deal.

BACKGROUND

I just purchased my first property in March, a primary residence that I’ll rent out in a year when I move. That got the ball rolling for me and since then I’ve been looking for the next investment. In the past week I decided action was better than inaction and I found what looked to be a solid deal

PROPERTY/DEAL DETAILS

4 bed 2 bath SFH in a growing neighborhood. Currently has a tenant paying just below the 1% rule, with market prices allowing me room to surpass exceed 1%. No rehab required (just some interior rework whenever the tenant eventually moved out and a few clean), property manager was going to stay on with current tenant so I'd avoid the initial fee, and COCROI was currently at 6% which would be over 10% once rent was near market rate.

Got all the info from my agent, answered all questions, and plugged the final numbers into my spreadsheet one more time.

OOPS

I made 2 big mistakes:

1) I had used a property management estimation percentage from a book rather than real examples, and I was off significantly (up to 16% from 11%)

2) my mortgage calculation was based on when I purchased my primary residence months earlier-it was not just an investment property, but it was for a mortgage under $100k...my interest rate was 1% higher, down payment was 25% instead of 20%, and I owed 1 point up front

Both my cash to close and monthly expenses increased, making for an abysmal COCROI. I was overly confident about my finances, sure of my calculations, and also extremely excited about the prospect of my first cash flowing investment property. The OTP was already drafted and I almost told my agent to send it before I realized all this.

Luckily this story ends well for today. I saved that capital to invest in an actual deal, I am now much more prepared to analyze future deals, and I even found a 4plex deal that I hope to offer on tomorrow. Alls well that ends well as they say, so I’ll call that a success story for today

@Patrick Menefee

This is a deal you ended up not doing?

Definitely better to find out up front on paper than to find out later on your balance sheet.

16% property management seems a bit steep. Did you shop that one around a bit?

@Geordy Rostad correct I didn’t end up doing it.

Glad you brought that up on the management as I explained it poorly. The 11 or 16% was meant to capture annual expenses on a monthly basis, assuming 1 year turnover on tenants. 1 time fee + monthly rate / 12, which i think actually came out to 14% now that i think about it again (instead of 9%...forgive my confusion).

Most id seen were 1 month rent for placement plus 8% monthly (comes out to 16.3%), and this one was half month rent for placement plus 10% monthly (comes out to 14.2% monthly).

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